A Gas Company That&rsquo;s Not Full of Hot Air

Charles Carlson, editor of the DRIP Investor, finds a “growth cyclical” he thinks will continue to post strong earnings in good economies and bad.

I have never been a huge fan of “deep” cyclical stocks—those firms, such as steel and autos, whose earnings realize wide swings depending on the economic cycle.

However, I do like “growth” cyclicals—companies whose products are sensitive to the economic cycle yet have shown a propensity to put up surprisingly steady growth numbers over the years. Air Products & Chemicals (NYSE: APD) is a classic growth cyclical.

Air Products provides specialty gases and performance materials to the industrial, energy, technology, and health-care markets. Around 50% of its business comes from markets outside the US. The breadth of the company’s markets provides some cushion from downturns in any one sector.

Electronics markets have been especially strong of late, as have the company’s “merchant” gases, which include industrial gases and certain medical and specialty gases. Perhaps as a reflection of the strong demand, the company planned to raise prices on several products on October 1.

[Proposed] price hikes include a 30% increase on bulk helium, an 8% increase on liquid oxygen and liquid nitrogen, [and a] 12% increase on liquid and bulk hydrogen. Higher prices should help the company’s net profit margins, which have expanded in each of the last four years.

The company is expected to post its fourth consecutive year of double-digit earnings growth in fiscal 2007 (ending September 30th). That streak [should] continue in fiscal 2008. Air Products is [projected] to post profits of $4.34 per share this year, up 24% from fiscal 2007. For fiscal 2008, profits are expected to climb 12% to $4.87 per share.

Investors who want exposure to a number of industries may find these shares an interesting way to diversify a portfolio.

Air Products trades at 19x the fiscal 2008 estimate. That’s hardly a bargain-basement valuation. Still, while the stock is not cheap, the company’s strong operating performance merits a premium valuation [and] should help these shares at least match the market’s performance over the next 12 months, [while] long-term appreciation prospects are above average. Investors should feel comfortable buying at current prices (it closed around $95 Wednesday—Editor) and stepping up purchases on declines below $85.

The dividend has increased annually for more than 15 years. The current quarterly payout is 38 cents per share. An increase is likely in the first half of 2008. The stock currently yields 1.5%.

Air Products offers a direct-purchase plan whereby any investor may buy shares directly, the first share and every share. Minimum initial investment is $500.